Now is the time to build momentum for meaningful reforms that address Africa’s needs
In recent years, the world has experienced a rise in the number and frequency of crises such as climate change, the COVID-19 pandemic, and geopolitical conflicts. This highlights the need for urgent action to tackle the most pressing global challenges of our time. However, international responses to these crises have been disappointing, and lessons from the past have not been properly learned. Multilateral Development Banks (MDBs) are uniquely qualified to address today’s crises with strong country-specific programs. However, their approaches and fiscal impact need improvement, and concessionary funding must be scaled up to effectively address the development challenges ahead. To address these issues, the G20, international development community, and CSOs have all repeatedly called for in-depth reforms of MDBs. Unfortunately, African voices are often absent from conversations on global financial architecture issues.
To address this deficit, the third meeting of African think-tanks under the Amplifying Africa Voices Initiative, held on January 31 and co-convened by the African Center for Economic Transformation (ACET) and the Finance for Development Lab (FDL), specifically focused on MDB reforms.
MDBs play a unique role in tackling today’s global development challenges while maintaining vital country-level programs.
The scale of financing required to respond to shocks, finance development and achieve the SDGs, and address climate change is estimated to be in the trillions of dollars. To meet these challenges, MDBs need to triple their financing, bilateral aid needs to double, and private capital flows need to rise significantly.
MDBs are central to achieving these objectives, because their financial model, which makes all member countries, including developing countries, shareholders, allows them to leverage their resources. And unlike many developing countries, MDBs are still able to borrow from international capital markets. For example, the World Bank Group’s International Bank for Reconstruction and Development (IBRD) has been able to lend more than $750 billion between 1944 and 2020, with a capital of only $18 billion, provided by its 189 member countries.
Given the scale of today’s new global challenges, MDB financing will need to be increased significantly.
Concessional financing only provides around $200 billion per year, which is clearly insufficient, considering that climate financing alone requires $2 trillion per year. There is a view that MDBs are overly constrained by mandates and are too focused on protecting their capital base. A push by MDB non-borrower shareholders has led MDBs to focus on low-income countries (LICs) while withdrawing concessional lending to middle-income countries (MICs) . This was due in part because of the increased access of MICs to international capital markets. In particular, during the Covid-19 pandemic, concessional lending to LICs rose sharply, while non-concessional finance for MICs saw only a modest rise. MDB lending is seen by many as not aligned with the priorities of emerging economies, and it comes with high costs related to policy conditionalities, rigid safeguards, and lengthy processes.
The Independent Review of MDBs’ Capital Adequacy Frameworks (CAF)
The panel recommended strategic shifts in five areas of the capital adequacy frameworks to maximize the impact of MDB’s capital. These included adopting more efficient management of capital and risk, defining risk tolerance more precisely, relying more on callable capital, increasing the rate of financial innovations, and engaging in a closer dialogue with credit rating agencies. The panel also recommended creating an enabling environment for reform through greater transparency and information. The CAF report suggests that these actions could allow MDBs to substantially increase available funding by $1 trillion while protecting the World Bank’s AAA credit ratings.
Following the CAF Report, shareholders during the 2022 WB/IMF Annual meetings called on the World Bank to produce an “Evolution Roadmap”. In December 2022, the World Bank released its roadmap, which focused on the need to broaden and redefine poverty appropriately, while also revisiting the “shared prosperity goal”. The roadmap broadly accepted the need to deepen engagement with MICs, increase financial capacity, and work harder to catalyze private capital and mobilize domestic resources. However, it also warned that such reforms cannot lead to much more financing in the absence of a capital increase.
During the discussion, think tanks and experts criticized the report for its lack of ambition and innovation and an inattention to the need for increased finance for poorer countries. This is highlighted by the report’s inadequate emphasis on striking the right balance between financing global public goods investments related to mitigation and resilience enhancement, particularly in terms of food security. Increasing the disbursement of funds will require significant changes in safeguards, legislation, governance, and human capacity. Moreover, it will be necessary to enhance national planning and donor coordination, as well as learning and evaluation capacities. To ensure new financing is effectively used, Nationally Determined Contributions (NDCs) need to become more disciplined and ambitious.
Currently, the dialogue on how to leverage MDB capital is mostly a G20 political dialogue and there are three key issues to be resolved:
How to continue advancing the agenda for low-income countries as the unit cost of development increases, especially given the challenges of climate change adaptation and mitigation.
With regards to MICs, how to ensure that climate lending does not come at the cost of other development goals.
Even if climate financing is expanded, how can it match the borrowing needs.
Throughout this process, it is critical to ensure that African voices are influencing the design of the reforms.
It is time for a new institution with equal participation or a new African-led and focused financing instrument. A proposal for the creation of a new climate finance institution was discussed. This institution would ensure equal participation between the Global South and Global North, with representatives from governments, civil society, and the private sector.
Alternatively, some policy institutes have suggested that rather than creating new organizations, it may be more effective to streamline existing ones with overlapping mandates. However, despite the potential benefits of this approach, attracting funding from the private sector remains a significant challenge.
Establishing a new instrument focused solely on climate finance may be more feasible. Such an institution could more easily attract funding from the private sector, provide incentives for carbon credits, elicit political will, and serve as a channel to sell green bonds.
The discussion focused on the political economy challenges of reshaping the international financial architecture for improved development. While significant global financial resources were dedicated to the Covid-19 response and the ongoing conflict in Ukraine, many Africans feel that the continent has been neglected. This has resulted in widespread dissatisfaction and anger.
Some policy institutes felt that reforming the international financial institutes is an impossible task, as it is a zero-sum game, where any gain in voice or voting rights by one party results in a loss for another. Others are more optimistic. But all agree that for African perspectives to have a chance of influencing these debates, there is need for a much stronger effort to articulate its collective vision for reform.
Given that G20 members India, Brazil and South Africa are or will serve as presidents of the G20 in the next three years, there is an opportunity for African think tanks to build momentum on the financing agenda by deepening and filling the void of African voices on these topics. Concrete proposals need to be advanced to inform African leaders. This is even more urgent now that the African Union (AU) is seeking a seat at the G20.
Two tracks of ways forward
Workable solutions for global financial architecture reforms need to come from Africa. It will come down to strategies combining public goods and national development plans. The challenge is how to structure new instruments to address the current crises and provide solutions where governments fail to do so.
The African economic policy institutes have discussed two tracks of research:
Proposals for structuring a new instrument.
Leveraging what is already happening on the ground in Africa. In this way, and with a strong African voice in global fora, the new global financial architecture can reflect on Africa’s priorities.